Fed Still Needs More Inflation

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In April of 2016,  I presented a thesis that the Fed would need to see more real inflation before hiking rates.

The article is below.

https://loganmohtashami.com/2016/04/15/fed-rate-hikes-need-more-inflation/

Separately I wrote that  core inflation would need to get to 2.5% or  the Atlanta wage tracker would need to hit 4% before we would see the 2nd rate hike.

I was 0.1% off on that call.  The Atlanta Fed wage inflation tracker was 3.9% when the Fed did it’s 2nd rate hike. For 2017, the Fed is planning three more rate hikes.

Regarding the timing for these hikes, note the following:

Labor cost are rising.  The recent Fed wage tracker is still at 3.5% even with the recent dip.
https://www.frbatlanta.org/chcs/wage-growth-tracker.aspx?panel=1

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However, the rest of the wage metrics are still slow and steady. So there is no over-heating of tight labor market yet in the sense that wages are spirally out of control.Wage Inflation

  1. Wage Inflation

    A must follow on twitter.

Johnny Bo Jakobsen ‏@jbjakobsen

No signs yet of an overheated US labour market

logan-labor

Weird. What happened to the expected boost from minimum wage increases?

bo

We have these wages with job openings being over 5,000,000 for some time now and the quits ratio reaching to prior cycle peaks.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2017/02/07/job-openings-labor-turnover-clues-to-the-business-cycle

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2. Inflation is rising for sure

Inflation is rising. Dollar commodity trades to the downside have reversed course and unleashed an epic rally in commodities and forward looking inflation metrics. This is mostly due to the rise in oil but coal prices are also on a tear.  However, we have to be mindful that the world is still in a  demographic deflationary mode.

Manufacturing picking up, input prices rising, and yet every developed central bank in the world is easing with the exception of the US…

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3.CPI and Personal Consumption Expenditures   (PCE), for the most part, are still tame. At this stage of the cycle, if world trade picks up even more then the deflationary factors will be less.  However, the PCE hasn’t hit 2% since 2012. If both metrics rise and world inflation trends picks up, then we can expect a 2-3  more rate hikes. But we aren’t there yet.

Note: PCE has been under 2%, 50% of the time for the last 20 years.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2017/01/31/two-measures-of-inflation-and-fed-policy

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The difference between this year and last year is that we now have a world reflation trade happening. If those trillions of dollars of negative rates turn positive and we see core inflation and Core CPI pick up, then we can easily expect the three rate hikes. But remember that headline inflation will pass up core inflation only due to oil rising from a lows set last year. What I am trying to say here is to not read too much in the oil inflation story because it’s moving from $26 to above $50.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2017/02/06/weekly-gasoline-price-update-regular-and-premium-unchanged

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As you can see above we are no where close to the highs in oil before the dollar got stronger and this is the main driver of headline inflation.

From Doug Short
https://www.advisorperspectives.com/dshort/updates/2017/01/18/consumer-price-index-headline-cpi-rises-above-2
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World trade is picking up and this taking bond yields and inflation up. If this trend continues, it will cause world inflation to go higher, leading to a rise in global yields. If that happened then the Fed could hike rates  3 times. However, I  don’t expect to see this big rise.

So for now, no 3 hikes on the table. There is no real inflation scare or  a run-away economy.

From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2017/01/20/treasury-yields-a-long-term-perspective

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Just a note on our 10 year yield. We are in a wide range here from 2.27% – 2.62% ( Today 2.38%) and for this year we haven’t broken any key levels yet. If we break under 2.27%, expect a 1 handle on 10’s.  A clean break over 2.62%  on the 10-year should create a test of the key 3% line. I never bought into the hype of inflation and that has been the right call for many years.  For 2017, I am sticking to my multi- year prediction that the 10 year  will stay in that key 1.60% – 3% channel. Certain headline events can bring us under 1.60% such as the Spain Default fear trade of 2012 and Brexit of 2016. However, for the most part we have been in this range for some time now.

From Fred:
https://fred.stlouisfed.org/series/DGS10

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Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing marketLogan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data  daily on his own facebook page https://www.facebook.com/Logan.Mohtashami